ACCTING2502 Accounting Method

6 Pages / 1,442 Words Published On: 31-10-2019

The trial balance of KLZR Ltd for the year ended 30 June 2018 is presented below:

	Debit	Credit
	$	$
Sales revenue		997,000
Dividend revenue		7,000
Interest revenue		3,000
Cost of sales	355,000
Impairment loss – goodwill	5,000
Auditor remuneration	36,000
Depreciation – motor vehicles	45,000
Depreciation – plant and equipment	46,000
Doubtful debts	8,000
Interest expense	32,000
Office expenses	92,000
Rental expenses	15,000
Salaries	104,000
Selling expenses	97,000
Bad debt recovered		26,000
Loss on destruction of building	42,000
Income tax expenses	61,000
Cash on hand	13,000
Inventories	298,000
Receivables	192,000
Provision for doubtful debts		12,000
Bank deposits	40,000
Deferred tax assets	24,000
Franchises (cost)	95,000
Goodwill	100,000
Accumulated impairment losses – goodwill		20,000
Motor vehicles	150,000
Accumulated depreciation – motor vehicles		50,000
Plant and equipment	460,000
Accumulated depreciation – plant and equipment		147,000
Shares in listed companies (cost)	62,000
Accounts payable		102,000
Bank loan		100,000
Bank overdraft		35,000
Current tax liabilities		59,000
Deferred tax liabilities		24,000
Unsecured notes		150,000
Paid up capital (400,000 ordinary shares)		400,000
General reserve 1 July 2017		15,000
Retained earnings 1 July 2017		225,000
	2,372,000	2,372,000

Additional information:

Auditor remuneration includes $16,000 in fees for management consulting services.
The franchises currently valued at cost of $95,000, were revalued to fair value of $115,000. Assume a tax rate of 30%.
The directors have declared a dividends of $65,000.
The directors have proposed a transfer from retained earnings to a general reserve of $25,000.
The depreciation expenses for the relevant assets are used for selling and distribution and administrative purposes, as detailed below:

	Selling and distribution	Administrative
	$	$
For motor vehicle	25,000	20,000
For plant and equipment	36,000	10,000

Question 1.

Salaries of $104,000 are incurred for: $60,000 for selling and distribution purposes and $44,000 for administrative purposes.

The rental expenses are for administrative purposes.
KLZR Ltd uses the single statement format for the statement of profit or loss and other comprehensive income and classifies expenses by function within the statement.

Required:

Prepare a statement of profit or loss and other comprehensive income and a statement of changes in equity for KLZR Ltd for the year ended 30 June 2018, according to the requirements of AASB 101. Notes to the accounts are not required but figures in your statements must be supported by explanations and/or workings. Ignore the requirement for prior period comparative figures.

Question 2

Accounting policies and other disclosures

UTAR Ltd is finalising its financial statements for the reporting period ending 30 June 2018. On 20 August 2018, before the financial statements have been finalised and authorised for issue, the company’s directors become aware of the following situations:

The company holds shares in a public listed company, Binnie Ltd. The shares were valued at their market value at reporting date of $200,000. A major fall in the share market occurred on 12 August 2018, and the value of UTAR Ltd’s shareholding in Binnie Ltd declined to $150,000.
One of the company’s major debtors, Fancy Ltd, filed for bankcruptcy on 10 August 2018. UTAR Ltd’s financial statements have been prepared reflecting a 50% doubtful debts provision for this account, with the carrying amount of this debtor stated at $400,000 ($800,000 less provision for doubtful debts of $400,000). It appears, at 10 August 2018, that no amount will be recovered from Fancy Ltd’s liquidator in respect of this account.
On 30 June 2018, UTAR Ltd had a United States dollar loan outstanding (non-current liability) amount of US$200,000. Given the exchange rate at reporting date of A$1.00 = US$0.91, the load is stated in UTAR Ltd’s statement of financial position at a value of $219,780. A major fall in the value of the Australian dollar occurred on 13 August 2018, such that the exchange rate fell to A$1.00 = US$0.87. The Australian dollar equivalent of the United State dollar loan therefore rose to A$229,885.
On 18 July 2018, it is discovered that a divisional manager has been under-depreciating plant and equipment. The motivation of the manager was to maximise the division’s profit figure in order to maximise his bonuses. The carrying amount of the relevant plant and equipment in UTAR Ltd’s financial statement is $1,500,000. An investigation by the company’s internal audit division, presented to UTAR Ltd’s directors on 15 August 2018, suggests that the plant and equipment has a recoverable amount of $1,150,000.

Required:

Assuming that each of the independent events described above are material events, you are required to:

Classify the events as either an adjusting or non-adjusting event after the end of the reporting period. Justify your classification and make reference to relevant authority when appropriate.
Base on your answer to 1 above, prepare the necessary journal entries or note disclosures to comply with the requirements of AASB110.

Question 3

Accounting for equity

Tara Ltd was incorporated on 1 July 2017. The following transactions and events occurred during the year ended 30 June 2018:

1 Aug 2017	Tara Ltd makes an offer to the public for investors to subscribe for 5,000,000 shares, at an issue price of $6.00 per share, with $3.00 payable on application, $2.00 payable within one month of allotment, and $1.00 payable on a call to be made at a later date.
30 Sep 2017	Applications close, with applications received for 5,200,000 shares.
10 Oct 2017	Shares are allotted on a first-come first-served basis, and application money is refunded to unsuccessful applicants.
10 Nov 2017	All allotment money is received.
1 Feb 2018	The call is made, with money due by 28 February 2018.
28 Feb 2018	All call money is received except for holders of 100,000 shares who fail to meet the call.
14 Mar 2018	The shares on which call money was not received are forfeited and sold as fully paid. An amount of $5.30 is received for each share sold. The balance in the forfeited shares account after reissue is returned to former shareholders.

Required:

Prepare the journal entries necessary to account for the above transactions and events. Show all relevant dates and brief narrations.

Question 4

Revaluation of assets

Companion Ltd acquires an item of machinery on 1 July 2016 for $190,000. The useful life and residual value of this machinery is estimated to be six years and $10,000 respectively. The directors elect to depreciate machinery on a straight-line basis.

On 30 June 2017, Companion Ltd adopts the revaluation model for machinery. On this date, the directors determine that the fair value of this machinery is $150,000. As at 30 June 2017, this machinery is expected to have a remaining useful life of five years, and the estimated residual value is revised from $10,000 to $6,000.

On 30 June 2018, the directors determine that the fair value of this machinery is $140,000. As at 30 June 2018, this machinery is expected to have a remaining useful life of four years, and the estimated residual value remains unchanged at $6,000.

Assume a tax rate of 30%.

Required:

Prepare the necessary journal entries to account for the item of machinery (including entries for acquisition, depreciation and all revaluation entries) for the period 1 July 2016 to 30 June 2018. Show all relevant workings.

Solution-1

KLZR LTD.
Statement of profit and loss and other comprehensive income for the year ended 30 June, 2018
		For the year ended 30 June, 2018
Sales		$ 997,000
Less: Cost of sales		$ (355,000)
Gross Profit		$ 642,000
Add; Non-operating income
Interest revenue	$ 3,000
Dividend revenue	$ 7,000
Bad debt recovered	$ 26,000	$ 36,000
Less: Selling & Distribution expenses
Depreciation – motor vehicles	$ 25,000
Depreciation – plant and equipment	$ 36,000
Salaries	$ 60,000
Selling expenses	$ 97,000	$ 218,000
Less: Administration expenses
Depreciation – motor vehicles	$ 20,000
Depreciation – plant and equipment	$ 10,000
Rental expense	$ 15,000
Salaries	$ 44,000
Loss on destruction of building	$ 42,000	$ 131,000
Less: Finance costs
Doubtful debts expense	$ 8,000
Interest expense	$ 32,000	$ 40,000
Less: Other Operating expenses
Office expense	$ 92,000
Impairment loss – goodwill	$ 5,000
Payment to auditors
in the capacity of auditors	$ 20,000
in the capacity of consultants	$ 16,000	$ 133,000
Profit before tax		$ 156,000
Less: Income tax expense		$ 61,000
Profit for the year		$ 95,000
Other comprehensive income
Gain on revaluation	$ 20,000
Tax on above	$ (6,000)	$ 14,000
Total other comprehensive income		$ 14,000
Total comprehensive income for the year		$ 109,000

KLZR Ltd.
Statement of changes in equity for the year ended on 30 June, 2018
Particulars	Amount
Paid up capital
Balance as at 1 July, 2017	$ 400,000
Add: changes during the year	$ -
Balance as at June 30, 2018	$ 400,000
Retained Earnings
Balance as at 1 July, 2017	$ 225,000
Add: Profit for the year	$ 95,000
Less: Transfer to general reserve	$ (25,000)
Less: Dividends declared	$ (65,000)
Balance as at June 30, 2018	$ 230,000
General Reserve
Balance as at 1 July, 2017	$ 15,000
Add: Transfer from retained earnings	$ 25,000
Balance as at June 30, 2018	$ 40,000
Revaluation Reserve
Balance as at 1 July, 2017	$ -
Add: Fair valuation gain credited in OCI	$ 14,000
Balance as at June 30, 2018	$ 14,000
Total Equity	$ 684,000

Solution-2

Part-(a)

Events	Adjusting or non-adjusting	Justification
1	Non-Adjusting event	As per AASB 110, the adjusting events are those events whose evidence of occurrence are available on the reporting date. As no evidence was available on the reporting date, hence it is a non-adjusting event.
2	Adjusting event	As per AASB 110, the adjusting events are those events whose evidence of occurrence are available on the reporting date. As events were available on the reporting date, hence it is an adjusting event.
3	Non-Adjusting event	As circumstances or evidences for decline in exchange rate were not available on the reporting date, hence it is a non-adjusting event and no adjustment is required.
4	Adjusting event	As on balance date, it is very well known that depreciation is under charged, hence evidence of less depreciation was available, so it is said that it is an adjusting event.

Part-(b)

Events	Journal Entries	Note Disclosures
1	NA	As per para 21 of AASB 110, the disclosure is as under, "The value of company’s investment has gone done by $50,000 due to sudden fall in the share market."
2	Doubtful debts Dr. $400,000 To Accounts receivable $400,000 (To record receivable written off)	NA
3	NA	As per para 21 of AASB 110, the disclosure is as under, “The value of company’s USD loan liability has increased by $10,105 due to sudden fall in the share market, resulting in a loss of $10,105.”
4	Depreciation expense Dr. $350,000 To Accumulated Depreciation $350,000 (To record depreciation)	NA

Solution-3

Journal entries in the books of Tara Ltd.
Date	Description	Amount
30-Sep-17	Bank A/c	$ 15,600,000
	Share Application A/c	$ (15,600,000)
	(To record receipt of share application money recorded)
10-Oct-17	Share Application A/c	$ 15,600,000
	Share Capital A/c	$ (15,000,000)
	Bank A/c	$ (600,000)
	(To record allotment of shares and refund of excess money)
10-Oct-17	Share Allotment A/c	$ 10,000,000
	Share Capital A/c	$ (10,000,000)
	(To due share allotment due)
10-Nov-17	Bank A/c	$ 10,000,000
	Share Allotment A/c	$ (10,000,000)
	(To record receipt of share allotment money)
1-Feb-18	Share Call Money A/c	$ 5,000,000
	Share Capital A/c	$ (5,000,000)
	(To due share call money)
28-Feb-18	Bank A/c	$ 4,900,000
	Share Call Money A/c	$ (4,900,000)
	(To record receipt of share call money on 4,900,000 shares)
14-Mar-18	Share Capital A/c	$ 600,000
	Share Call Money A/c	$ (100,000)
	Share Forfeiture A/c	$ (500,000)
	(To record forfeiture of 100,000 shares forfeited due non-payment of call money)
14-Mar-18	Bank A/c	$ 530,000
	Share Forfeiture A/c	$ 70,000
	Share Capital A/c	$ (600,000)
	(To record reissued of forfeited shares)

Solution-4

Journal entries in the books of Companion Ltd.
Date	Description	Amount
1-Jul-16	Machinery A/c	$ 190,000
	Bank A/c	$ (190,000)
	(To record purchase of machinery)
30-Jun-17	Depreciation - Machinery A/c	$ 30,000
	Accumulated Depreciation - Machinery A/c	$ (30,000)
	(To record depreciation for the year ((190,000-10,000)/6))
30-Jun-17	Accumulated Depreciation - Machinery A/c	$ 30,000
	Revaluation Loss A/c	$ 10,000
	Machinery A/c	$ (40,000)
	(To record revaluation of machinery)
30-Jun-18	Depreciation - Machinery A/c	$ 28,800
	Accumulated Depreciation - Machinery A/c	$ (28,800)
	(To record depreciation for the year((150,000-6,000)/5))
30-Jun-18	Accumulated Depreciation - Machinery A/c	$ 28,800
	Revaluation Surplus A/c	$ (18,800)
	Machinery A/c	$ (10,000)
	(To record revaluation of machinery)

Note-1

Calculation of revaluation gain / loss as on 30 June 2017

Carrying value as on 30 June, 2017

$ 160,000

Purchase value

$ 190,000

Depreciation for 2016-17

$ (30,000)

Fair valued amount as on date

$ 150,000

Revaluation Gain/ (Loss)

$ (10,000)

Note-2

Calculation of revaluation gain / loss as on 30 June 2018

Carrying value as on 30 June, 2018

$ 121,200

Carrying value as on 30 June, 2017

$ 150,000

Depreciation for 2017-18 ((150,000-6,000)/5)

$ (28,800)

Fair valued amount as on date

$ 140,000

Revaluation Gain/ (Loss)

$ 18,800

References:

(2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB110_08-15.pdf

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